Russia Struggling Under Low Oil Prices, Sanctions

The plunge in oil prices combined with Western sanctions is costing Russia’s economy as much as $140 billion this year, according to Finance Minister Anton Siluanov.

“We’re losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent,” Siluanov told a Moscow news conference on Nov. 24. “The main issue that affects the budget and economy and financial system … is the price of oil and the fall in monetary flows from the sale of energy resources.”

That estimate jibes with the economic principle that for every $1 drop in the price of oil, an oil producer loses about $3 billion in export earnings. The average price of a barrel of oil fell from almost $115 per barrel to $80 in the past five months. This is particularly harmful to Russia’s economy because oil and natural gas make up about two-thirds of its exports.

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Siluanov’s comments on the impact of the sanctions contrast with the country’s political leadership. The sanctions were imposed by the United States and the European Union because of the crisis in Ukraine. But both President Vladimir Putin and Foreign Minister Sergey Lavrov have dismissed them as ineffective.

This isn’t the first time Siluanov has urged Russia to economize in order to ride out its current economic trouble. He’s also warned against Putin’s plan to greatly increase defense spending over the next three years. But at the Nov. 24 news briefing he said Moscow should be particularly wary of the persistent drop in oil prices.

“If you’re talking about the consequences of geopolitics, they are, of course, substantial,” he said. “But it’s not as critical for the exchange rate and even for the budget as the oil price.”

Siluanov’s comments come as OPEC prepares for a summit on Nov. 27 at its Vienna headquarters. Some members of the cartel, including Venezuela, Iran and Libya, have urged OPEC to reduce production in an effort to shore up prices. But Saudi Arabia, the group’s most prolific and influential producer, appears ambivalent about a cut.

In an interview with the Russian news agency ITAR-TASS published on Nov. 23, Putin attributed the lower oil prices to the US and Saudi Arabia. In the case of the US, he said, the reason is the boom in the extraction of domestic shale oil. As for Saudi Arabia, he suggested, “Perhaps the Saudis specially want to‘kill’ their rivals …”

Related: Russia Might Be Forced To Cut Oil Production

Moscow relies on taxes from the country’s oil and natural gas companies for about two-thirds of the government’s annual revenue. Its draft budget for 2015 is predicated on the price of oil averaging $100 per barrel. Most industry observers, however, believe that price will stay around $80 for the near future.

That would leave Russia in need of cash, which would be hard to find because the sanctions bar it from Western financial markets. So Moscow must either reduce government spending or raise taxes to keep its budget deficit at 0.6 percent of the country’s gross domestic product, which is estimated at between $1.9 trillion and $2 trillion this year.

Another option is equally unappealing: borrowing from local financial institutions, which probably would charge prohibitively high interest.

By Andy Tully of Oilprice.com

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